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10 Reasons Why Facebook Bought Instagram

When The Social Network 2 is written, I hope the screenwriter won’t pass up the chance to have Mark Zuckerberg explain to Sean Parker that “a billion dollars isn’t cool. Spending a billion dollars is.”

Facebook’s announcement Monday that it is acquiring Instagram, a precious mobile app for sharing retro-ized photos has everyone asking, ‘Why would Facebook pay $1 billion for a company with no revenue?”

1. Because it could. It’s fairly unusual for a company to drop a cool billion heading into its IPO, but Facebook already has a ton of cash on hand (just under $4 billion according to its S-1 filing) thanks to private share sales to Goldman Sachs, says University of Notre Dame biz prof Tim Loughran. “Facebook, with huge cash on hand, is already acting like a big, publicly-traded tech company,” says Loughran. “Facebook didn’t need to go public first to get the cash to make the major acquisition.”

2. Because it didn’t want a competitor to snap it up first. “It appears that Facebook really wanted to purchase Instagram before another bidder (maybe Google) made the deal,” says Loughran.

4. Because Facebook is having a midlife crisis, and the acquisition of the beloved, hip photo-sharing app is its equivalent of buying a sportscar. The universal consensus is that Facebook isn’t cool anymore. It’s got wrinkles, or at least many more users with wrinkles. By buying Instagram, Facebook bought itself 30 million hipsters, and all of their wonderful hipster cool.

5. Because most people are on Facebook to look at other people’s photos, and Facebook wants to keep it that way. Now you’ll be able to add all kinds of cool filters to your Facebook photos, a feature that attracted over 30 million people to Instagram. “Providing the best photo sharing experience is one reason why so many people love Facebook and we knew it would be worth bringing these two companies together,” said CEO Mark Zuckerberg. Om Malik at GigaOm translated that as: “Facebook was scared s**less and knew that for first time in its life it arguably had a competitor that could not only eat its lunch, but also destroy its future prospects.”

6. More data. Which translates into better mobile ads. Techie Robert Scoble argues that Instagram has a better idea of what its users are doing and what they like doing. “If you are a skiier, you take pictures of snow and skiing. If you are a foodie you take pictures of food at high-end restaurants. If you are into quilting, a lot of your photos will be of that,” writes Scoble at Quora. “Facebook’s databases need this info to optimize the media it will bring to you. This data is WORTH S***LOADS! Imagine you’re a ski resort and want to reach skiiers, Instagram will give them a new way to do that, all while being far more targeted than Facebook otherwise could be.”

7. Because it wanted to buy soul. Facebook has become a huge, money-making behemoth, which makes it very attractive to investors but makes it slightly harder to take Mark Zuckerberg seriously when he waxes poetic about the Hacker Way. The users of Instagram are still enamored of their little app, so much so that they feel outraged about it selling out. “Facebook bought the thing that is hardest to fake. It bought sincerity,” says Paul Ford at NYMag.

8. Because it’s cheaper than inventing a time machine. “Before Instagram, if I wanted my pictures to look like they were taken in the ‘60s, I’d have to invent a time machine and travel back 50 years,” said one of the Daily Show’s “youth” correspondents.

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Instagram strikes me as yet another feature-with-a-following masquerading as a company. Facebook can afford to buy the feature and its fanbase. What seems more telling is that Facebook’s business model is increasingly based on friends’ photos, and it’s depending on photo filters to make album trolling just a little more interesting for just a little while longer. Which sounds a lot like they’ve peaked and the slow decline is around the corner.

Now if they bought LOLCat technology, that would have been cool and a whole lot cheaper…

yep, I think the most important reason is that Facebook is having mid life crisis and 1 billion tag is because Instagram was backed by very strong investor with deep pockets. With 30 million users and strong investor probably spooked Facebook to buy Instagram for 1 Billion!!.

I dare to disagree with the myriad tech gurus who repeat the same canned arguments about Instagram and all similar so-called hip mobile apps. In contrast, I think behavior like Facebook’s is indicative of the nearing end of the new stock bubble. It’s bound to burst when companies drop $1 billion on mobile apps that haven’t turned a dime of profit and have no ground-breaking or hard-to-copy technology. I’ve elaborated about this on my blog:

I think it is quite simple why FB bought Instagram: they are scared of Apple and Instagram. iPhones are the number one camera right now (as per analysis done by Flicker). Apple’s Camera app does not allow for easy uploading to Facebook, so most users don’t upload iPhone photos to Facebook, a major loss to Facebook’s value. Apple knows this and seem to be asking for unacceptable terms from Facebook to integrate FB into the Camera app. By buying Instagram, Facebook acquired the number two most popular camera in the world, one that already is deeply integrated with Facebook. They acquired a marketshare of pictures taken by iPhone users. If Apple had acquired Instagram instead, they would have ended the integration with Facebook, just like there isn’t any integration of the Camera app, and Facebook would forever be excluded from 50% or more of all pictures taken in the world. So, will Apple play hardball and ask Instagram to delete integration with Facebook? If they do, Facebook will have just sunk $ 1bn for nothing.

The FTC/SEC/DOJ should absolutely block Facebook from buying one of its strongest competitors — Instagram. Instagram is a photo based social network. its one of the strongest competitors facebook has seen to date. Facebook has network effects. Without network effects Mark and Co. would have had strong competition a long time ago. Instagram is one of the few companies that found a hole in Facebook’s armour. It would be a shame to simply watch Facebook buy away the competition. Do the right thing FTC/SEC/DOJ and block the buyout.

Reason 11: To impress the prospective shareholders and to gain massive coverage prior to their IPO.

If they would have bought a company for say 10 Million, who would have noticed right? Now, just before Facebook was launched on Nasdaq, they acquired Instagram for 1 Billion. Their “feed the greed’ strategy worked pretty well.